What does it mean to Trade While Insolvent? (A 2022 guide for new business owners)
Companies are a special kind of legal structure since they offer limited liability and are considered autonomous legal entities. In some circumstances, the corporate veil may be lift, in which case directors may be held personally accountable for the actions of the company. Oftentimes, this happens when an insolvent company continues to operate. Section 588G of the Corporations Act 2001 dictates that directors must stop a business from running if it is insolvent.
It is a director’s responsibility to stop insolvent trading.
Directors engage in insolvent trading when they allow their business to accrue debts while the debts cannot be paid back when they fall due. When there is no realistic chance of a corporation escaping insolvency, directors engaging in insolvent trading is against the rules. The responsibility of the director is mandated by Section 588G (c) of the Corporations Act (Cth), and it is applicable not only when a corporation is declared insolvent but also whenever there are reasonable circumstances to believe it is or soon will be.
The consequences of insolvent trading
Insolvent trading is taken extremely seriously by the law, and business owners who fail to uphold their fiduciary responsibility to stop their business from doing so may be subject to a variety of fines. Insolvent trading has legal repercussions, such as compensation claims, civil fines, and criminal accusations.
- Civil Fines: Fines of up to $200,000 may be imposed as civil fines for directors.
- ASIC, a liquidator, or a creditor may bring personal compensation actions against a company’d directors on behalf of creditors. There is no upper limit.
- If dishonesty is discovered to play a role in insolvent trading situations, directors may be subject to criminal penalties. Directors who are found guilty face fines and/or jail sentences totaling up to $444,000 and 15 years, respectively.
Avoiding insolvent Trading
Knowing your legal obligations and responsibilities as a corporate director is important. Keeping accurate records is essential for you to perform your legal duties as a director. Without sufficient, thorough financial records, it is impossible for you to completely comprehend the financial situation of your company and perform your obligations. Consult a registered insolvency practitioner at Australian Insolvency Services as soon as possible if you have any concerns regarding the viability of your business.
If your business is insolvent, Australian Insolvency Services can help you consider your options. Speak to our professional and friendly team for free and confidential advice on our 24/7 toll-free hotline on 1800 210 073.